Banking

The Ship That Sank the American Banking System | ABA Banking Journal

By John Steele Gordon

If you would like to know how fragile the American banking system was before the Civil War, consider this. The sinking of a single ship in 1857 was enough to cause the failure of hundreds of banks across the country.

Andrew Jackson had killed the central bank, leaving bank regulation entirely up to the states. Some had good banking departments and some did not, allowing fraud to be rife. Bank failure became as American as apple pie as the number of small, weak, standalone banks proliferated. Most of them printed their own banknotes and there were thousands of different issues in circulation.

Almost half the banks founded between 1810 and 1820 had failed by 1825. A similar percentage of banks founded in the 1830s had failed by 1845.

The country had been in a deep depression after the crash of 1837 and didn’t fully recover until the Mexican War of 1846-48. And then the California gold strike changed the American economy profoundly.

While there had been a gold strike in North Carolina as early as 1799, the United States was not a major producer of gold. In 1847, the U.S. produced 43,000 ounces of gold, mostly as a byproduct of base-metal mining.

But in 1848 it produced ten times as much and the following year gold output reached 1.94 million ounces. As gold was the basis of money in the 19th century, the money supply shot upwards and the American economy went into overdrive. Railroad mileage tripled in the 1850s; pig iron production rose from 63,000 tons in 1850 to 883,000 tons just six years later.

As New York cemented its position as the country’s financial capital, more and more out-of-state banks kept large deposits in New York banks, and the number of New York banks increased by 27 just between 1851 and 1853.

Without a central bank to control interest rates and prevent what Alan Greenspan famously called “irrational exuberance,” irrational exuberance became the order of the day. The economy began expanding at an unsustainable rate.

By 1857, the underpinnings of the economy were beginning to sag. The amount of gold being mined in California began to decline. The Crimean War and a series of poor harvests in Europe had stimulated American exports. But they were both over by 1857. Thousands of New England cotton looms were idle, while ships in New York harbor could find no cargoes.

Companies began failing, and the banks that had lent them money began failing with them. Other banks began calling in loans to increase their liquidity, further contracting the economy. The big New York banks and, by extension, their client banks in the rest of the country, badly needed an infusion of hard money.

Fortunately, it was on the way. The SS Central America, a 278-foot sidewheeler, had left the port of Colón in Panama on Sept. 3 with 578 passengers and crew and no less than 30,000 ounces of gold, worth at that time $8.6 million. To give you an idea of how much money that was, total federal revenues that year were $69 million.

But on Sept. 12, she was caught in a hurricane off North Carolina and sank with the loss of over 400 lives. More important to Wall Street was the loss of the gold.

When news hit New York, panic ensued. Most banks in the country had to suspend payment in specie and many failed altogether, devastating local economies. Only during the Civil War did the country begin to develop a national banking system and a uniform paper money.

Most Related Links :
Business News Governmental News Finance News

Need Your Help Today. Your $1 can change life.

[charitable_donation_form campaign_id=57167]

Source link

Back to top button